Are the developers as a whole in trouble? Big TROUBLE???!

[cyphire]

Saw some interesting stuff this weekend. The new town homes off of Pearl and Draper were originally selling for between 1.895M and 2.395M. They are now for sale between 1.195M and 1.495. That is a huge drop! I checked them out with my wife about 5 months ago. They are complete crap. The moldings are about 2 inches high, the finishes are something from a prison movie and the town homes are right next to a big car wash which makes huge noise all day. They also overlook the field at Bishops School.

There is also a brand new home near me in the Birdrock area of La Jolla. It is literally in the parking lot of the Birdrock elementary school. It overlooks my sons classroom (about 20 feet away). They are asking 1.85M. It has no yard in the back (about 5 by 20) and you have to go into the school parking lot to go in the driveway.

There are a reasonable amount of absolutely ridiculous properties (like these 2) which are so flawed that only in a supertight market like 2 years ago would people have bought these orphan lots and tried to sell them for huge money.

The builder who did the addition to our Carmel Valley home (we sold 3 years ago) now only builds huge houses in Ciello. They are on the market for 2.8M and 3.9M. I am sure that all of his money is tied up in these properties and I don’t see him selling them for anything like these numbers.

I know 3 builders personally (actually not close to them, but through mutual acquaintances) – each are in desperate shape. One has a condo building downtown (I won’t say where to protect the innocent!!!), one by the water close to downtown (again wont say who), and the other who has a large condo project (still building them and trying to sell in Vegas). They are all in a lot of trouble (my friends who know them well say that they are in massive trouble – not speculation, but financial distress)

So most of the builders / developers / real estate people that I have personal knowledge of, have put them selves in huge jeopardy and will be both bankrupt as well as ruined from this crisis if things continue the way that they are going.

My aunt was a real estate developer in the 70’s and 80’s… She started with nothing and amassed a few million dollars before sinking everything into 3 major projects which then busted her because of the crisis in the 80’s. It seems to me that developers are basically gamblers who, even if made huge money in the run up, probably have put it all on the pass line, hoping the dice wouldn’t come up snake eyes. Well all that is being rolled right now are snake eyes. I think that these folks who were riding high have re-risked all their fortune to now lose it in the current dead market.

Any other stories of woe? Or does anyone know any developers who have pulled back / out and are ok?

[temeculaguy]

Here’s the problem cyphire, those in the business that correctly identified the peak in 2003 were proven wrong. Many were seduced back in and those who didn’t pull back in 03 confused good luck with a good plan. If everything you build sells, you never really learn how to build smart. This extends beyond the devloper/builders to most areas of the industry. To use your craps analogy, when you consistently hit the point over and over, never crapping out, it creates a false sense of security that causes you to press your bets. That’s why the casinos have craps tables, eventually they get it all back and then some. None of the national builders are O.K. and the smaller ones have even less reserves.

[NotCranky]

I got a story but if I tell it it would be a dead giveaway should the guy read it. Suffice it to to say he doesn’t have a clue where we are at and he is leveraging himself to death to go for the brass ring. My guess is he ends up with several foreclosures. What is interesting is that in my eyes that would be a case of a Kharma working just fine.

Also I have seen a fairly nice custom home go short sale right after being finished.It sold quickly.That must be a terrible experience for the owner. Still lots of custom building going on in Jamul and the active to pending ratio is something like 105-5. I think we will see more issues with the custom homes and some humongous spec homes that are in the works.

[patientlywaiting]

Many small development LLCs will declare bankruptcy just like they did in the 90s. Then 10 years from now, if those guys are still alive, they’ll spring back into action. In the mean time, they’ll just shrink to skeleton crews and do small less profitable jobs.

[cyphire]

Wow – I guess if you are in the building business – especially as a small developer, you probably have taken all your profits and plowed them back into more projects. These projects are probably going to soak up the profits thus erase the paper money gains from before.

I wonder if the banks who made the construction loans are in trouble….

Where I used to live, Olivenhain, there are 2 brand new mini-developments of 3 houses and 2 houses along Lone Jack Road. I notice that they have come down in price also from the 2M’s to 1.4M’s… And still aren’t selling…

[one_muggle]

Wow – I guess if you are in the building business – especially as a small developer, you probably have taken all your profits and plowed them back into more projects.

This is merely anecdotal, but a townhome builder I spoke with in the N.Va/D.C. area ~2006 seemed more level-headed.
He said that his cost per home was about $300-400k, and he was getting more than $700k per. According to him, he could take a fair haircut in prices and still profit, as long as land prices remained sub-sonic, which they were.
Like the smart RE people I know, he seemed aware of the risks and had prepared for leaner times–isn’t there an Aesop fable like this?

[cyphire]

How is the land cost sub-sonic? I have a feeling that a lot of these guys understate their true costs living in somewhat of a fantasy world. Was the land that he is building on purchased a long time ago?

[LookoutBelow]

Please tell me exactly how many people walk out of Vegas with their winnings ?

 

Double down baby…Yo Eleven !!

 

Thought so……. 

[one_muggle]

How is the land cost sub-sonic? I have a feeling that a lot of these guys understate their true costs living in somewhat of a fantasy world. Was the land that he is building on purchased a long time ago?

Just outside of DC, around Vienna, VA, their are (or were) tons of lots with decrepit buildings or just empty space–amazing as it sounds. One day, you would be driving past what looked like just dead space, the next they would drag out trees and such–and reveal a buildable lot. It was really quite impressive as it happened quite a bit, and only 10 or 15 miles outside of downtown DC.
The guy I talked with would buy a ~15,000 sqftlot for (if I recall) ~$400k, which was a major increase for the area, and plunk down 8-10 2000sqft (multi-story) TH and a parking lot for about $2.5M. So $2.5 + 0.5=$3M cost total. So it’s 300-400k per unit. At the time, the things were going for $700-800k, and more in the hip areas. But I know the land was much more expensive in those areas.
Crazy.

[cyphire]

It is crrzzy!

[Author]

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